Friday, August 29, 2014

Demand for higher NBN speeds not restricted to early adopters

NBN Co revealed at its full year results presentation that take-up of NBN services in the first 15 FSAMs is 68%. These are the areas that have already reached the copper disconnection date and gives the best indication of long term demand.

NBN Co also revealed that the product mix in these FSAMs is mirroring that for the network as a whole, including more than one in five customers choosing the 100 Mbps service.

More detail has been provided today in answer to Questions in Notice in the Senate. The table below shows the number of premises passed and the number of connections active and orders pending for each FSAM.

This shows take-up as only 63% for the whole 15 FSAMs. However, it has been widely acknowledged that fibring ARM-02 and ARM-03 was a mistake, as these are rooms in University student residences at the University of New England which are serviced by the campus LAN.

Excluding these provides the 68% take-up, which passes 70% once the pending orders are included.

The next table shows the distribution of the speed-tiers in each of these FSAMs. This is based on the speed tiers of completed orders rather than current connections and so will double count any case where there has been an upgrade or a subsequent disconnection.

The table shows that 22% of customers are ordering the 100/40 Mbps service.

This raises more doubts about the demand forecast used in the Cost Benefit Analysis. The report suggested a number of reasons for the strong take up - including “selection bias”, saying:

“it would be expected that households and businesses with a preference for higher speeds would take up the NBN where available first and other households would move to the NBN when alternative services would not be available.”

Asked about the discrepancy today Communications Minister Malcolm Turnbull said:

“Well they’re two different things. People may buy a plan that has a top speed of 100 megabits per second, but then the question is, what do they actually need? What is the speed they need to do the stuff they want to do online?”

This might be a satisfactory argument for making a technical decision to limit the capability of the network, but the demand analysis for the CBA is meant to be measuring what people want - what they are prepared to pay for.

If the demand for higher speeds - what people want and will pay for - is understated then the benefits of FTTP are also understated compared to technologies that will be less able to provide these speeds.

It also appears that demand for any of the over 100 Mbps products available on FTTP has simply been ignored.

The good news for NBN Co is that end users really do want their higher speed services at the prices RSPs are charging for them. That has to give the Board and management confidence as they continue to invest in completing the network.

Monday, August 25, 2014

Telstra and all that (mythical) cash

There has been plenty of commentary recently about the original NBN/Telstra Definitive Agreements. Alan Kohler speculated on what Telstra should do with all its cash, the ACCC questioned whether the revenue earned by Telstra should be considered in determining fixed line access prices, and Vodafone (among others) has called the payments "outrageous."

Part of the problem here is that there really isn't a lot of detail here on what the payments actually are and what the $11 billion actually represents.  This can lead to the kinds of scary claims made in CommsDay that the actual payments to Telstra could amount to $98 billion by 2067. This was based on pre-tax cashflows at the time of the original agreement. Optus has even included this number in a submission to the Competition Review in a section claiming that the NBN reforms aren't sufficient to address Telstra's dominance.

Way back in March 2010 it was actually Alan Kohler who wrote "A 'significant gap' remains, thought to be $4 billion (the difference between $8 billion and $12 billion)." When the deal was announced in June 2010 it was reported that:

The two parties have signed a financial heads of agreement, announced Sunday, that will provide NBN Co with access to Telstra's passive infrastructure (pits, ducts and backhaul fibre) and eliminate Telstra as a fixed-line wholesale competitor to the Government-owned entity.

The assets to be transferred as part of the deal were valued at $9 billion, whilst Telstra values the financial gain from "public policy reforms" signed as part of the agreement at $2 billion.
The $9 billion will be paid progressively as Telstra's copper network service is decommissioned and cable broadband network service deactivated. NBN Co will pay Telstra a fee for every customer migrated from these networks onto NBN Co's fibre network (upon which the figure of $9 billion was assumed).

So to summarise Telstra was after $12 billion in Net Present Value after-tax, and settled for $11 billion, of which $9 billion comes from NBN Co and $2 billion comes from "public policy".

Telstra broke that down in its Explanatory Memorandum on the deal in the graphic below (taken from the CEO presentation).

 The fine print notes that the NPV is calculated at June 2010. This makes up the construction of the $11B. Elsewhere in the document it notes that the NPV used a discount rate of 10% (other than TUSMA payments which were 8%).

A quick calculation shows that talking about $11 billion today is wrong - because at that discount rate it would be $16 billion in June 2014 value.

However, that is also not an accurate reflection because the cashflow profile has changed as a consequence of both the delayed commencement (getting the ACCC to approve the separation plan) and the additional delay from the (Telstra caused) asbestos remediation suspension.

The Telstra explanatory statement

Let's see if we can reconcile this data with the Goldman Sachs report.  Goldman Sachs (according to CommsDay) says of the $98B:

The bulk of this—some $88 billion—would be for infrastructure leases covering ducts, dark fibre, rack space and conduits. As the NBN Co footprint expands to cover all of the Telstra copper footprint, these payments would rise: from A$400m annually this financial year, to $1 billion in FY2019 and to $1.6b a year by FY2042. By 2067, NBN Co would be paying Telstra some $2.9 billion a year in lease commitments.

From 2042 to 2067 there will be no additional ducts or fibres used, so that increase can be used to deduce the inflation rate (2.4%) used. The early years assume a rate of uptake from 2010 to 2021 which for simplicity we will assume to be linear. That set of assumed cashflows results in a sum of payments of $89.4B -so overstated a bit. The NPV at disciount rate of 10% is $9.58 billion. But that is pre-tax. Post tax (assuming 30%) it is $6.7B - so we are getting to the same ball-park as Telstra's $5B (which can be explained by the profile being wrong upfront and the overall overestimation).

The disconnection payments are about half the $9 billion in NPV that Telstra gets from NBN Co. They are however received over first decade. If they are re-profiled to the same as the duct payments the effective cash-flow is simply about the same as the cash-flow for ducts.  That means that the total effective compensation that Tesltra receives in 2021 is somewhere in the range of $2-$2.5 billion.

Let's now consider what these payments look like compared to what Telstra is surrendering. At June 30 2013 Telstra had 6,543 retail voice lines, 1,239 wholesale voice lines and 1,322 ULL lines in operation.  The wholesale price for a ULL is $16.21 per month, and for a Wholesale Line Rental is $22.84. Assuming that it is reasonable to allocate the WLR price as the retail revenue that should be allocated for line rental, these two items add up to $2.390 billion.

In brief, the cash payments Telstra is set to receive is consistent with the cash flow they are forgoing by switching off the copper network.

Now this is a very rough calculation, and hasn't foreshadowed what the copper network revenue losses to Telstra would have been had it chose to compete with NBN Co. But what it does demonstrate is that there is not now some huge additional cashflow coming to Telstra.

Finally a note on the ACCC access pricing question. As Telstra switches off an element of its network it receives disconnection payments and duct rentals, at the same time its asset base shrinks. If the ACCC were to conclude that the payment Telstra receives is higher than the return the ACCC regulatory framework "permits" for the asset, the ACCC may decide to discount the prices for copper access products to compensate. To see how this is the wrong outcome consider the following. Assume that the amount NBN Co receives is exactly twice what the ACCC thinks it is worth. Then the discounting approach would result in an access price of zero once Telstra had switched off half its network.

Put simply the only consideration for the ACCC should be the asset still in operation. To avoid continually re-jigging this depending upon whether it is dearer or cheaper parts of the network, the ACCC should simply draw a line under the current RAB and price determination and determine an appropriate future price path - a combination of increasing inflation and ongoing asset depreciation. Not particularly hard.

Note: Calculations used in this article can be found here.

Sunday, August 24, 2014

The Scales report

My opinion piece 'Lessons from the latest NBN reviews' appeared in Tuesday's AFR commenting on the Scales and KordaMentha governance reviews.

It is by no means everything I would like to say about those reviews - but space did not allow more. This is a more extensive and updated commentary on Scales (but does not repeat everything from the original).

The Scales report released by the Minister for Communications, Malcolm Turnbull, into the public policy process from April 2008 to May 2010 is of little more than historical interest to the community.

Despite the access Bill Scales had to individual and documents, the report provides virtually no new information on the development of Broadband policy. The reverse is sometimes the case, that Scales passes over or fails to consider significant issues.

Most importantly it found absolutely no evidence that there had been at any point a public announcement that was different to the private advice. This is most significant given the way Mr Turnbull continued to assert that there was some mischief in the policy process. 

For example, in answer to a question without notice on 20 November 2013 he tried to connect the calculation by Lazard's of a negative $31 billion NPV with the Corporate Plan detail of a 7% IRR saying "No wonder Australians lost faith in Labor. No wonder they are sick of their spin." 

Later on 11 December he finished an answer with "Tomorrow we will see the truth about the NBN. The Labor Party do not want to hear it. They do not want to know how many billions of dollars they have wasted. They do not want to know how many falsehoods they have told." None of the reviews conducted by Mr Turnbull has found any evidence of falsehoods.

However, its political and public policy purposes and conclusions should be noted by all because they will continue to be the core themes of policy over the next few years..

There are three important observations to make. The first is that all policy is bounded by the current reality, optimal solutions are constrained by sub-optimal starting points. The second is that the public service has been so gutted from 1996 on that it is unable to perform its essential roles. The third is that because public policy is determined by a political process, all statements are political.

The current Minister has regularly made much of the limitation he faces in implementing his NBN policy by the current state of NBN Co. The same was true of Senator Conroy as Minister who inherited two decades of policy failure. This started with the policy to pursue infrastructure based competition that so spectacularly failed in fixed line markets. It was compounded by the privatisation of Telstra.

The facts at the time Labor announced its 2007 policy was that Telstra had made a totally unacceptable policy proposal to Howard Government, and that Government had struggled to respond. In his report Scales claims “During 2007 the Howard Coalition Government was actively attempting to speed up the roll out of broadband in Australia.”  A core element of the “Australia Connected” package announced in June 2007 is stated as:

A plan to facilitate a new commercial fibre optic network build in cities and larger regional centres via a competitive bids process and subsequent enabling legislation. This process was to leverage the previously announced proposals to roll out a commercial fibre broadband network by Telstra and the G9 consortium (neither organisation was seeking funding). The aim of the competitive bids process was to evaluate the regulatory arrangements for the investment in an open and transparent manner. (P.16)

This was, in effect, a tender for regulatory arrangements. Telstra was seeking exemptions from aspects of the access regime while G9 required access to Telstra’s copper. The Departmental process for this exercise was the precursor to the NBN Mark I - with an Expert Panel chaired by the Secretary of the Department.

The final main component of the environment Senator Conroy inherited was a Telstra management team that had declared outright war on the Government. Bill Scales had his own disagreements with Donald McGauchie, the Telstra Chair who led the robust changes. The Chair’s insistence in hiring John Short to assist with the final privatisation was claimed to be the reason for Scales resignation.

That the conditions for policy implementation are far from ideal puts additional pressure on the public service. The Scales report, and indeed the National Audit Office review of NBN Mark I, found the public service at least missing in action in the outcomes. Scales in his report concludes:

It is clear to me that during the whole of the period of this Audit, public officials involved in the NBN policy development process, in both its manifestations, worked with remarkable dedication and commitment to attempt to make this policy work….

However, it is also clear from the evidence provided to this review and from the comments from those I interviewed from within the public service that they had difficulty in having their ‘voice’ heard on many of the most important public policy matters related to the Labor Government’s NBN policy.

Scales notes that in part this can be attributed to the chaotic processes of the Rudd Government. He is generous and attributes it to the specific circumstances of the early Global Financial Crisis period, but as history shows there was a serious issue with the management approach of the Prime Minister himself. The recommendation that the Australian Public Service examine its capability and impact is certainly worth adopting.

As I will explain later I think Scales is over-describing the supposed impact of the chaos and the impact in Government on the project. However, there are a number of very specific areas where the public service was deficient in executing the Labor 2007 policy. Two principal ones were the choice of a standard tender process and a lack of appreciation by Department officers of the centrality of industry structure reform to the Government.

The ANAO report on the NBN tender referred approvingly of the processes pursued by the Department to maximise competitive tension. This is usually a good thing, because it brings the price to Government down. But it was entirely the wrong outcome for the NBN. The two major expected respondents, Telstra and the G9, meant that the loser of the tender was going to become a customer of the winner.

While Telstra had, in the words of Phil Burgess, rejected the idea of holding hands and singing Kumbaya, the idea of a single approach with all RSPs participating was actually the best outcome for Government.

The evaluation criteria for the tender included the degree to which the response resulted in industry structural separation, but it was only one and none of these had been weighted. When the Regional Telecommunications Independent Review Committee chaired by Bill Glasson proposed to include in its recommendations an absolute requirement for structural separation under the NBN, Departmental officers expressed concern. On their reading this was not an absolute requirement. The Minister’s office had no such concern.

As the Mark I tender came to a conclusion this became the defining issue for Telstra. It was the Government’s refusal to undertake not to seek structural separation that resulted in Telstra not submitting its full bid. (It is also worth noting that Scales concludes the exclusion of Telstra was entirely appropriate). Telstra could only be taking this position so late in the process because the centrality of the issue was not clear in the tender.

Senator Conroy has made no secret of the frustration he found with the Department Secretary he inherited and her reappointment. He has always been clear that structural separation was a core element of the policy, and has been clear that a simple purchasing tender process was always the wrong approach.

I do know that when the Secretary was writing the strategic imperatives for the Department she had implementing the Government’s policy as the primary objective. As I was briefly in the Department at the time, I suggested that the actual first priority was to advise the Minister on the economic, social and technological changes occurring that might require a policy response. The Secretary rejected that.

The position of the Department Secretary reflected two changes that had occurred under the Howard Government. The first was the unequivocal position that policy would be made by Ministers and communicated to the Public Service for implementation. The second was that expert advice was no longer provided by the bureaucracy but outsourced.

So to the extent the Public Service failed in the implementation of the NBN policy it was primarily a consequence of Howard Government reforms.

On this subject there is clearly much progress to be made. The Government also released last week a perfunctory response to the Interim Report of the Senate Select Committee on the NBN. In a number of places it states that a more detailed view of the issues arising can be found in a document (Response to the Senate Select Committee) which was posted on the Minister’s blog. The metadata of that document reveals it was authored by a member of the Minister’s staff.

Finally, the Scales Review provides deep insights into how public policy is always inherently political.

The first evidence is in the management of the report itself which has been released in a way designed to maximise the reporting of a simple message. It was tabled out of session in the Senate and posted on the APH website just before 5pm. Journalists from The Australian were asking questions of Opposition members as early as 5:15pm (or as late, given deadlines). Only The Australian and Communications Day seemed to be aware of it. The Australian predictably splashed the story under the headline “Labor’s NBN ‘rushed, chaotic’." Yet the fact is that Scales didn't say the NBn process was rushed and chaotic, he said that Government as a whole rushed and chaotic at the time the report was considered.

Minister Turnbull then ran with his rehearsed lines about Labor’s NBN being a most wasteful exercise. However, Minister Turnbull did not reflect on the substance of the Scales report, in particular recommendations that all projects over $1 billion be subject to cost benefit analysis by the Productivity Commission or Infrastructure Australia. That is perhaps because Mr Turnbull eschewed these august bodies for his own CBA, and secondly because his CBA is two months overdue.


My published comments noted:

Reports also focused on the criticism of the ACCC’s advice on the cost of FTTP versus the cost of FTTN followed by an upgrade. The two Professors on the Expert Panel are, however, have previously stated that it was a conclusion reached independently of the ACCC advice.

In fact it is far worse than this. Professor Tucker this week came out to record that Scales was wrong on his assertions about the ACCC advice writing:

He also argues the panel of experts (of which I was a member) assisting the Rudd government did not properly test advice from the Australian Competition and Consumer Commission (ACCC) about the upgradeability of a Fibre-to-the-Node (FTTN) network to a Fibre-to-the-Premises (FTTP) network, and that the panel inappropriately relied heavily on this advice in making recommendations to the government about the development of the NBN.

Professor Coutts made his in a letter to Communications Day so I will repeat them here:

Re ‘Rod Tucker claims Scales ignored advice on ACCC role’ in yesterday’s CommsDay. As a member of the expert panel with Rod Tucker on the 2008/09 version of the NBN formulation I can only strongly echo Rod’s comments that we thoroughly considered the options for the NBN particularly FTTN and the possible scenarios to transition to a FTTP solution which is accepted worldwide as the ‘final solution’ as [Telstra chief scientist] Dr Hugh Bradlow has said publicly several times! Our conclusion in 2008 that FTTN could not be assumed as a transition to FTTP (unless done by Telstra!) was reached before the ‘unsolicited’ report by the ACCC was received literally at the 11th hour of the process and certainly did not influence our conclusion. Mr Scales mentions only one (Analysis-Mason) of three detailed reports comparing the costs of FTTP versus FTTN which we considered, all of which are in the public domain!
Rod, I and Tony Shaw each individually told Bill Scales that the ACCC ‘bombshell’ as it has been termed was NOT a major influence (let alone a ‘bombshell)’ on our conclusion re FTTN transition to FTTP. Tony Mitchell who was unable to meet Mr Scales also shares this recollection. I cannot usefully speculate on what John Wiley and Patricia Scott would recall as influencing their decision to concur with the conclusion made by the panel. Hopefully the history of NBN will be written from objective analysis of the evidence (both written and oral) and after reflection of outcomes for Australia!

Kim Williams demonstrates bias for prejudice over facts

The SMH published an extraordinary extract from Kim Wiliams' new book Rueles of Engagement yesterday. Headed NBN wars we are told that 'Former Foxtel and News Corp chief executive's new book explores the dysfunctional regulatory regime that set the stage for the government's costly NBN rollout.'

The extract is so riddled with errors I am reproducing it in full here with my commentary. The original text is in bold - my commentary in italics.

In periods of technology evolution it is profoundly dangerous for governments to act as a proxy for normal commercial processes. Anointing winners never works. That is not and should never be the game of government.

"Normal commercial processes" in fact do not apply to the construction of infrastructure with natural monopoly characteristics. Government is forever picking "winners" - be that for tenders for road construction or even in making the decision which road to build. The NBN policy consisted of both - an attempt by tender then a decision to self construct.

The National Broadband Network (NBN) is the most recent example of an unaccountable announcement with a humungous financial commitment being made by a government with limited real understanding of its actions, based on poorly developed strategy and nothing more than technology romance. The hubris contained in a commitment to provide ‘‘ fibre to the premises’ ’ (FTTP) for more than 95 per cent of Australian homes misunderstood the complexity of the technical landscape, especially with regard to the exponential innovation and growth in smart wireless technology. It would be a subject for a political sitcom.

The Government's initial policy decision announced in April 2009 was informed by a range of Government agencies and the outcome of the original tender. That is on the record and backed up by the Scales Review. The final decision - the one on which funding was made - flowed from the Implementation Study and the first Corporate Plan. The decision was very well informed.

Evidence of the role of the Implementation Study and other research flows in the move from a 98% FTTN originally proposed, to a 90% FTTP goal and then a 93% FTTP objective in the Statement of Expectations informed by the Implementation Study and the Corporate Plan. In fact, understanding the "complexity of the technical landscape" is why there has NEVER been a goal to connect "more than 95 per cent" with FTTP.

No-one in the tech community is still backing "smart wireless technology" as an alternative to deeper fibre penetration. 

I followed the NBN with keen interest because it was core to the future of media and telecommunications and fundamental to any number of future commercial decisions. At Foxtel we embraced a constructive approach, given the then government’s almost virulent dislike for any public or private criticism, and so we assumed it would be happening and we had better live with it and ensure the best outcomes we could. In a speech to the National Press Club I think I used the euphemism ‘‘ bold’ ’ or ‘‘ courageous’’ .

Is it indicative of Williams that when he follows something with "keen interest" that he gets the detail of the policy wrong?  I do admit that I could never understand News Ltd's opposition to the NBN. While it potentially gave a serious leg-up to OTT competitors, it also offered News the ability to break out of its very unhappy symbiotic relationship with Telstra. 

Williams in his Press Club address used "bold". One might think he could have looked it up on the Foxtel website himself rather than rely on his memory. That speech - of course - was just the usual very insular diatribe of the Foxtel wish list. Nothing at all really about visions of the digital economy, just a narrow insular position of what served the interests of Foxtel. 

The original decision by Kevin Rudd and Stephen Conroy reflected an unusual degree of ignorance as to how the broadband challenges in Australia had come about from poor regulatory settings and the absence of well-developed long-term policy. The complex set of circumstances as to what was driving this craziness seemed to be well understood in the telecommunications markets but was badly managed on both sides of politics and abominably by the bureaucrats who were commercially naive and inexperienced. The result is that a cost well beyond $40 billion has been foisted on the taxpayer with uncertain return let alone secure capital recovery.

The simple fact is there were two contending views of the "complex set of circumstances" that were creating the broadband challenge. Telstra's view was that it had no incentive to invest in an environment of cost-based regulation, its competitors view was that Telstra had the incentive and opportunity to favour itself through being vertically integrated. 

Both challenges were attempted to be addressed through the NBN Mark I tender, through the contribution of Government capital to ease the investment hurdle, and the requirement for a separated open-access network. I will agree that the use a standard procurement process tender resulted in a poorly managed outcome, but the ANAO does not share that criticism. 

As has been outlined in the first interim report of the SSCNBN the so-called "Radical Redesign" scenario in the NBN Co Strategic Review is the more accurate description of what the Board and management of NBN Co were forecasting in September 2013. It still however understates revenue and overstated potential completion times. That scenario does not support the contention of "uncertain return let alone secure capital recovery."

The NBN could easily have been established with existing and new private sector telecommunications players using their own capital, provided the ground rules as to operational objectives had been clearly spelled out and the regulatory settings and expectations were clear and sufficiently certain that the necessary long-term capital could be deployed confidently . This would have confined the cost to the taxpayer to several billion dollars to meet evident areas of disadvantage (economically or geographically).

This was simply not the case because the player with access to the network refused to bid on the basis that structural separation was not something they were prepared to agree to. 

The reason that this sad, confused disarray has come about lies equally at the doors of the Australian Competition and Consumer Commission (ACCC) and a neophyte government possessed with the view that it could solve the issue with a single silverbullet solution.

There was a public policy process that ran for almost two years from the April 2009 announcement, and it was a revision of a previous policy approach. This was neither rushed nor determined by the activity of a single agency.

The decision was made in an air force jet between Kevin Rudd and Stephen Conroy with no financial or other constraints; the worst kind of politics: fast-fired , remote decision making with no professional or grounded advice as to how it might work and how it would be defended convincingly over a very extended timeframe.

The extent to which any "decision" was taken on a VIP flight in January 2009 it was simply that the Minister could bring forward an alternative proposal to NBN Mark I to Cabinet. Everyone should read the Cabinet Manual - that is how everything starts. Development of a policy to bring to Cabinet requires the approval of the PM first. 

In fact as Wayne Swan's book has now revealed there WAS a proposal to rush the analysis and include it in the stage 2 stimulus announcement in February. But it wasn't - it was subject to detailed review by central agencies and the SPBC (or gang of four).

Telecommunications in Australia has been bedevilled by a dysfunctional regulatory regime ever since the OTC/ Telstra merger and then when the Telstra monopoly was broken and subsequently privatised. The ACCC, due to its serial under-performance in the telecommunications arena, is largely to blame. It has a well-developed ideological detestation of Telstra on the one hand and has enabled itself to be gamed ruthlessly by Telstra’s competitors on the other.

The ACCC has no "ideological detestation" of Telstra, no matter how much it might feel like that to Telstra. At the point Williams is referring to ACCC decisions were subject to merits review by the Australian Competition Tribunal and I am unaware of any case where the Tribunal found against the ACCC. 

"Gaming" was a conduct involved in by both sides, as ultimately it should be if firms are seeking optimal outcomes for themselves. That the system itself suffered from serious design flaws that permitted gaming there is no doubt.

What it has never achieved is a clear set of operating rules to achieve a constantly improving competitive landscape that encourages competition and innovative evolution to consistently improve consumer outcomes. The commission seems never to have accepted that when competition works well it can be ferocious – there are winners and losers.. All too often the commission endeavours to correct the market for those who fail in order to shape and drive it, aiming to shape the market in an image that suits its own preferences. The ACCC has not been held to account by successive governments and, in fairness , parliaments for the entirely dysfunctional telecommunications landscape and the resultant costs that have been passed over to the longsuffering taxpayer.

No doubt, from time to time Telstra has massively overplayed its hand and the competitive respondents have resorted to invoking excessive recourse to the ‘‘ mother regulator’ ’ in response. What has resulted is a largely toxic regime between the ACCC and Telstra from the late 1990s through the first decade of the 21st century.

The ACCC was never making "winner vs loser" decisions nor exercising subjective judgement. It implemented the law, as is its job. 

David Thodey’s regime as CEO of Telstra in recent years has convincingly addressed much, but the negotiated outcome in that period to secure the NBN has become the new reality: it replaces a private, near-monopoly network with a new government-owned and controlled monopoly, which hardly constitutes major progress on any reasoned analysis.

Let's just be clear that the operation of Telstra as a private near-monopoly is a creation of the 1990s. The model of Government building and owning telecommunications infrastructure has been the global norm - other than in North America. That original monopoly HAD repaid all is capital and provide a return on investment each year prior to privatisation - an asset with a carrying value of zero was then sold for tens of billion of dollars.

The only time anything like infrastructure based competition had threatened it was in HFC networks, and Foxtel was the beneficiary of the decision by Telstra to build its own. Just so that the former CEO of Foxtel gets it - the HFC network which was Foxtel's only original distribution medium was built by Telstra when it was entirely Government owned.

And also, so he gets it, there is a huge difference between a vertically integrated firm that competes in retail markets with its wholesale customers and a wholesale only open access network.

Conroy was obsessed that the provision of enhanced broadband would be centred around an FTTP approach across the length and breadth of Australia . This was built on the vainglorious empty statement he repeated endlessly to anyone who would listen: ‘‘ nothing is as fast as the speed of light’’ . This approach had little to do with the reality of hybrid technology environments and the complexity of modern technology options and networks, let alone diverse user needs and affordable costs. The leaden hand of government in mandating that the solution had to be fibre and a new monopoly demonstrates the poor intellectual investment in the whole process.

I don't recall Senator Conroy using the line "nothing is as fast as the speed of light" much - though it has been used by many, including the head of New Zealand's Crown Fibre Holdings.  As I've previously written it is also dumb, because the propagation speed of light in a silica fibre is slower than either radio waves or current in a twisted pair. 

The fact that Kim Williams hadn't read it does not mean that there had been no extensive analysis. Some was in the public domain. Also as I wrote for the AFR an analysis of FTTN post NBN Mark I was pointless as Government had no access to copper, and also as I wrote for the AFR (different story) to get Telstra to take Government seriously they had to commit to a network that did not need Telstra. 

There was no publicly available strategy supported by an independent needs audit or future options backed up with an independent cost/benefit analysis. For the government to usurp an arena where the private sector has the capital capacity and experience, reject existing players and accept the financial and rollout responsibility in the largest single start-up in world history should demand an explanation and clear reasoning and accountability for the decision.

The Government did not "reject existing players", existing players rejected the Government. As to private sector "capacity and experience" to build the network, NBN Co used exactly the same outsourced contractors that Telstra has used over the years - including one, Visionstream, that began its life inside Telstra as the special purpose vehicle to build the HFC network for Foxtel.

The NBN in its creation, its commitment , its settings and its performance is a wholesale testament to policy and regulatory failure. If private sector undertaking was done in this fashion it would never secure finance and the board and executive team of that entity would lose their positions.

This is a line that it is hard to determine whether Williams has copied from Malcolm Turnbull or Malcolm Turnbull was picking up originally from Kim Williams. However, the Strategic Review, the Scales report and the KordaMentha review of governance have ALL FAILED to find any evidence of any policy process or governance failure. Indeed, as noted above, the Strategic Review more than anything else confirmed the business plan for FTTP. Far more importantly the Strategic Review's very best effort to calculate the "real cost of Labor's NBN" fell spectacularly $20 billion short of the number that News Ltd had blazoned across the front page of the Daily Telegraph in April 2013.

Rudd/Gillard have lost office but the ACCC continues with its ideological kitbag, its unaccountable slow processes and its lack of any capacity to innovate and provide efficient regulatory solutions that provide certainty to investors and better outcomes for telecommunications consumers. I only hope that Ziggy Switkowski, the new NBN Chairman, and his new CEO, former Vodafone CEO Bill Morrow, bring their considerable operational experience to deliver a better, saner, transparent operating environment.

Let's just have one last ideological swing at the ACCC shall we? The only "ideological kitbag" the ACCC has is its prosecution of the Competition and Consumer Act and the neoclassical ideal of competitive markets. Williams extensive list of senior executive roles includes a mix of artistic bodies, public sector bodies and private sector firms. The bulk of his private sector experience, however, has been as head of two firms that were the dominant player in very concentrated industries. One of those, Foxtel, achieved the monopoly status that any evolutionary economist would identify as the standard endpoint. That firm's comfortable position will now face competition as the consequence of technological change. It is no wonder that Williams finds "competition policy" anathema.

I really don't want to read Kim Williams book, but I am now fascinated by what else he might say.

Judging however from this extract perhaps the reason he was no longer required at News Ltd was because of a tendency to conduct analysis on the basis of personal prejudice rather than facts.

Footnote: The decision by Telstra to partner with News Ltd for pay TV and create Foxtel has been described by David Thodey as the "best decision ever." (It was in the AFR - trying to find link). For the history buffs the wise people in Telstra in charge of HFC, having decided to build an HFC network and having lost Seven and Packer to OptusVision, were determined to find an overseas pay TV partner (to match the presence of Continental CableVision in OptusVision). Only two people inside Telstra made the case for News Ltd - Harvey Parker and myself. Harvey was the more influential, but I had many productive discussions with Malcolm Colless.  

Tuesday, August 19, 2014

Telstra and its NBN Renegotiation

One swallow does not make a spring

There is so little apparent progress being made on the NBN and so little information from the Telstra, NBN and Government bunkers about the renegotiation of the Definitive Agreements that the briefest of statements is subject to intense speculation.

While the really big news of Telstra’s results announcement was strong profit growth and a share buy back, one short paragraph on the NBN got all the news. That paragraph in full read:

This Commercial Framework anticipates a change in the approach taken in respect of the copper and HFC network assets, from staged decommissioning, to NBN Co owning some or all of such assets progressively as the NBN is rolled out. As the current arrangements already provide that Telstra is progressively restricted in its ability to use the copper and HFC network assets, the Commercial Framework does not contemplate any incremental value to be received by Telstra for the transfer of ownership.

Different reports claimed the Commercial Framework used different language, one going so far as to call it  a signed non-binding heads of agreement.

The agreed Commercial Framework falls far short of a heads of agreement.

The detail that attracted attention is that it does not contemplate any incremental value to be received by Telstra for the transfer of ownership. But the same paragraph reveals the framework “anticipates” NBN Co owning “some or all of such assets.”

This indicates that the framework doesn’t go as far as even scoping the assets to be included.

Repeating a statement by David Thodey in May that continued asset ownership provided Telstra with “optionality going forward”, the results statement goes on to say “continued ownership of these assets did provide Telstra with some protection in respect of future changes in the NBN project.” It notes that Telstra is now “seeking to agree other contractual mechanisms which are designed to protect Telstra against future changes in the project.”

In brief there is potentially still a great deal of work to be done getting from the Commercial Framework to an agreement.

As outlined here in June the first lot of Telstra negotiations took two and a half years to be completed. There is no reason why the renegotiation should take so long, but the Commercial framework is still a stage before a signed Financial Heads of Agreement.

The Telstra statement included a warning that after the full financial deal is agreed, there could be additional regulatory delays, noting that “any renegotiated arrangements between Telstra, NBN Co and the Government will need to be reviewed by relevant regulators (including the ACCC) who may seek to impose further regulatory measures.”

The payment for the transfer of the assets isn’t the primary issue NBN Co needs to face. Its three cost concerns are the cost to remediate the copper network, the ongoing cost to maintain the copper and the cost to develop information systems to manage the asset it has acquired.

And everywhere “copper” is mentioned it still potentially means twisted pair copper from telephony network ad coaxial copper from the HFC network.

That said it was interesting to see The Australian report that the Minister had seized on the development since “critics” had insisted he would have to pay Telstra extra money. The first such critic, though, was Malcolm Turnbull himself in a blog post (now no longer accessible on his site - see Note) in May 2011. His comments were, however, faithfully reported by The Australian under the headline  ‘Telstra in for billions if NBN plans change’. (see Note below)

The developments in Australia stand in stark contrast to the latest development in the UK. There the use of the copper network by BT OpenReach has been the last desperate effort of an incumbent to sweat a sunk asset. But The Guardian reports “The government has raised the prospect of switching off the UK's copper telephone network, some of which is 140 years old, as it consults on the nation's future digital infrastructure needs.”

Ultimately Australians concerned about faster broadband don’t care about a lot of this detail. They either want the deal with Telstra completed so that the FTTN rollout can commence or the FTTP rollout to speed up.

Currently neither is happening.

Even measuring the rate of current roll-out got harder as a consequnce of changing the metric at the end of March. At the last SSCNBN hearing NBN Co claimed the twelve week run-rate for premises passed to 30 June was 6,853. However  the run rate for premises from 4 May to 7 August was 4,015 (and only 3,871 for premises servicable.)

The chart below demonstrates there is some difficulty introduced by the change of reporting metric for premises passed. There are only two data points available for the old metric (26 May and 30 June) that were provided at Estimates and the SSCNBN respectively.


The reporting of the Telstra issue does provide a small moment of hilarity. The Australian report
started, “Communications Minister Malcolm Turnbull yesterday seized on the development, given that critics had insisted that taxpayers would have to pay Telstra extra money to get control of the copper.”

It stands in somewhat stark contrast to a story The Australian ran on 14 May 2011 under the headline ‘Telstra in for billions if NBN plans change’. That story began:
TELSTRA could receive a multi-billion-dollar windfall if a Coalition government sought to redesign the National Broadband Network, opposition communications spokesman Malcolm Turnbull has warned.
Opening up a new front on Labor's $36 billion project, Mr Turnbull said Telstra could receive billions to make available parts of its copper network that it would have been paid to decommission under Labor's plan for super-fast broadband.”

The article was quoting a blog post from Mr Turnbull (available in web archive) saying:

the Telstra-NBN deal will not simply deliver Telstra a $9bn windfall for decommissioning the customer access network but, in addition, set Telstra up to receive more billions when inevitably a future government -- certainly a Liberal government, and very likely a Labor government, too -- seeks to redesign the network topography in a way that reduces the crippling cost of the fibre-to-the-home design without compromising the promise of universal, very fast broadband.”

So the first politician to claim that the Telstra renegotiation would cost billions was Malcolm Turnbull himself. It is interesting that one journalist was an author of both stories.

Monday, August 18, 2014

Rundle gets the PM right

I am not normally a fan of Guy Rundle. But today in Crikey he might just have got Tony Abbott right.

Writing under the heading Tony Abbott, Australia's Most Powerful Sycophant (paywall) Rundle confesses that up until last year's election the PM presented as a complex character, that he was "a man with, it seemed, a sense of vocation coming from the Catholic Right of politics, with an idea of how politics fitted into the wider question of civilisation and of personal character."

Rundle goes through a list of latest gaffes - the effusive praise for Murdoch, the Scotland statements, the "unsettled" remark, latching onto the US in Iraq (and even asking to be asked to help) - to support his proposition that "he’s a sycophant by nature who seeks out opportunities to please those more powerful than he by being more ardent in pursuit of their interests than they ever asked him to be in the first place."

This is a better - and more complete analysis - than I'd thus far been able to achieve myself. 

All I could see was that PM Abbott was very similar to SRC President Abbott; having won the job he had no idea what he wanted to do with it. He had a list of things he was against (as PM the carbon tax and boats, as SRC Pres compulsory student unionism and funding for gays and feminists). In both cases he didn't understand that winning the election was only a step on the journey - you needed a plan after it, and some skills in managing.

The question then emerges of what motivates Tony Abbott. It is not like the position of Kevin Rudd, who also lost his way in Government. Rudd has been described as a former Minister as a "psychopath", and it fits. He was only motivated by the power of the job. This isn't the current PM.

Tony Abbott's modus operandi, according to Rundle, is "pleasing the nearest big power or audience." This explains his University behaviour in relation to Santamaria, his support of the monarchy and his relationship with John Howard.

I don't buy into Rundle's theories about the origins of this behaviour; and ultimately it is not the cause but the behaviour that affects us. It is Rundle's conclusion about political action that matters:

What matters, for those of us who would like to see the Abbott government rendered a one-term proposition, is whether it helps to predict a behaviour that Abbott himself would have less than complete control over -- and thus to create opportunities to demonstrate to the Australian people that Tony Abbott is more interested in serving higher powers, whether it be God, Crown or Mammon, than he is in simply and effectively representing the best interests of all Australians.

UPDATE: The original Rundle story reminded me of one of Tony Abbott's earlier comments (pre-election) on Syria (thanks to Simon Banks for digging it out for me). The SMH story began (emphasis added):

Would-be prime minister Tony Abbott has signalled that if he wins Saturday's poll, Australia will take a cautious approach to international affairs, saying that as a middle power Australia should not "be getting ideas above our station" in considering involvement with a possible US strike on Syria.
Appearing on ABC's 7.30, Mr Abbott said "we have to be very careful, because if we break something, we own it".
"I don't think we should be getting ideas above our station, " he said.
While "Australia has some heft in the world", and Australian governments of both sides had historically supported the US in military endeavours, Mr Abbott said "I just think we need to be very careful in a situation like this cause we can easily make a bad situation worse by acting precipitously. I would be very cautious about this."
"I don't think we should be getting above ourselves here. We are a significant middle power but no more."

It is not now that he thinks we are any greater a power or should be less servile, just that he thinks being more robust on the situation is what is called for. After all, despite crowing about what Australia did on the Security Council, he still thinks we shouldn't be there.